Many of today’s issues are impacting the future of life insurance product design.
For instance, by Jan. 1, 2009, reserves for all newly issued life policies must be calculated using the 2001 Commissioners Standard Ordinary mortality tables. The same tables will be required for tax reserve calculations but starting a year earlier on Jan. 1, 2008. Thus, many insurers are targeting that date for marketing their new 2001 CSO products.
Some product managers are concerned that state insurance departments will be overwhelmed with new filings in 2007. So, they are preparing to get their products off to an early start on the design/filing path.
In fact, some companies already have filed and are marketing their 2001 CSO products for term life and whole life insurance products. Moving to 2001 CSO generally benefits the profitability of both products because of the lower reserves. The actual product design is not affected except for possibly having lower WL cash values.
Universal life and variable universal life products are impacted the most–not only their reserves but also the guaranteed cost of insurance rates and the guideline premiums are lower. Therefore, companies generally have waited to file and market their 2001 CSO UL products (except some policies with lifetime secondary guarantees, which the new mortality table allows to have lower reserves).
Efforts to develop a principles-based reserving system appear to be rounding the base paths quickly, though admittedly there is more ground to cover. These changes will also lower reserves in many instances. But more aggressively priced products with long-tail risks (such as UL with secondary guarantees) may actually have higher reserves under the new methodology, particularly in the early policy durations.
Term insurance will probably have the biggest reduction in reserves. It will be interesting to watch how the major players in this market respond to those changes.
Principles-based reserves represent a move away from formula-based approaches, relying instead on company experience and, for some products, stochastic analysis across scenarios. This will pose significant practical challenges for some, not only in implementing the new standards for financial reporting but also for product development, which must contemplate reserves expected into the future.
The winners may be companies that anticipate needed product expertise and modeling capabilities and that develop those skills internally or with consultants or reinsurance partners having these strengths. Also needed: good procedures to monitor mortality and persistency experience.
Financial management and accounting for term and UL with secondary guarantees have increased in complexity in recent years, reducing the amount of reserves needed and in turn premium rates.
Traditionally, reinsurance has been used to reduce reserves and surplus strain. Companies have been using letters of credit either through external reinsurance or more recently through internal reinsurance as a way to reduce the capital expense. But lately, large companies have been securitizing large blocks of term insurance to reduce term reserves. While this process is becoming more efficient, significant expense and time is still involved in implementation.
Meanwhile, many direct writers have relied less upon teaming with reinsurers, preferring to retain more risk themselves.
Along with life insurance reserves, mortality rates have been under increased scrutiny in recent years, especially for older age mortality. Insurers and reinsurers are trying to become more comfortable with death benefits they should expect to pay at ages above 70. There has not been much experience at these ages, especially at the higher issue ages. Consequently, insurers are expending more effort to understand how much to discount their expected mortality due to underwriting.
In fact, some are re-examining the nature of underwriting at these ages. Experience from the long term care insurance world indicates that physical or mental functional tests may prove to be better predictors of mortality at these ages than traditional life underwriting tools such as blood tests. The combination of an aging population and insurer recognition of the changing market (as in higher maximum issue ages on life policies) has increased the need for understanding older age mortality.
Mortality rates also are being more closely reviewed for preferred classes. The Society of Actuaries is undertaking a study that will categorize insurance policies into a lineup of preferred and standard nonsmoker categories much as in the early 1980s with nonsmoker and smoker rates. In the meantime, many insurers and consultants have been examining experience, the slope of mortality and the value of modern underwriting tools into later durations. Sentiment is growing that the slope of the 2001 Valuation Basic Table (the basis for the 2001 CSO table) is too steep and is not representative of mortality slopes that can be expected in the future.